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ACCT 2123 - END OF TERM ASSIGNMENT (NOTE: This is a REQUIRED assignment, NOT bonus. It is due by 10 p.m. on the last Saturday of the term. Please submit your solution(s) in an email to me.) Alan Fox has been the Chief Financial Officer (CFO) for Johnson Manufacturing for nearly 20 years. Johnson Manufacturing owns the factory building that houses its operations, but the company's production levels are nearing maximum capacity for the factory building's size. The company is considering expanding and possibly constructing a new larger factory building to house all of its operations. Construction of the new factory building is expected to cost $1,000,000, and the building is expected to have a 14-year life. Rupert Stone, the company's Chief Executive Officer (CEO), has asked Alan to "run the numbers" and come up with a recommendation for approval or rejection of the expansion project to be presented to the company's board of directors. Rupert reminds Alan that the company must have a rate of return of at least 6% on any investment. After carefully analyzing the numbers, Alan estimates that the expansion project could produce maximum additional future annual net cash flows of $100,000. The present value factors from the Present Value of an Annuity of $1 Table for 14 periods are as follows: Periods 4% 5% 6% 7% 14 10.5631 9.8986 9.2950 8.7455 REQUIRED: 1. Calculate the Net Present Value (NPV) of the expansion project. Assume that the factory building will have no salvage value. Show all of your calculations. (4 points possible.) 2. Calculate the Internal Rate of Return (IRR) for the expansion project. Show all of your calculations. (4 points possible.) 3. Based on the results of your NPV and IRR calculations above, should Alan recommend approval or rejection of the expansion project? Provide explanations for your answer. (4 points possible.) 4. Alan's sister, Paula, has just started up a new construction company that specializes in the construction of commercial buildings. Alan is extremely eager to see his sister's company get off the ground and become successful. Two years ago, Paula's husband, David, was severely injured during combat while serving with the United States Army and is totally and permanently disabled as a result of his injuries. Since David's injury, Paula has become very involved with the Wounded Warrior Project, serving as Chairman for the charitable organization's local chapter. She is also involved with several other charities in the area that provide food and other necessities to the homeless. Paula has pledged to donate 15% of the net profits from her construction business to charity. Alan knows that a $1,000,000 construction project could be life-changing for Paula's new company, Paula's family, and countless individuals impacted by the charitable organizations Paula is involved with. Alan could easily and discreetly) increase the estimated future annual net cash flows by a small amount (approximately $8,000), thereby changing the results of the calculations supporting a different recommendation to Johnson Manufacturing's board of directors. Explain why Alan should or should not consider doing this. Your explanation should be at least one-half page long (typed, double-spaced, preferably in a Word document) and should include adequate reasoning supporting your conclusion after considering all of the circumstances. (18 points possible.) ACCT 2123 - END OF TERM ASSIGNMENT (NOTE: This is a REQUIRED assignment, NOT bonus. It is due by 10 p.m. on the last Saturday of the term. Please submit your solution(s) in an email to me.) Alan Fox has been the Chief Financial Officer (CFO) for Johnson Manufacturing for nearly 20 years. Johnson Manufacturing owns the factory building that houses its operations, but the company's production levels are nearing maximum capacity for the factory building's size. The company is considering expanding and possibly constructing a new larger factory building to house all of its operations. Construction of the new factory building is expected to cost $1,000,000, and the building is expected to have a 14-year life. Rupert Stone, the company's Chief Executive Officer (CEO), has asked Alan to "run the numbers" and come up with a recommendation for approval or rejection of the expansion project to be presented to the company's board of directors. Rupert reminds Alan that the company must have a rate of return of at least 6% on any investment. After carefully analyzing the numbers, Alan estimates that the expansion project could produce maximum additional future annual net cash flows of $100,000. The present value factors from the Present Value of an Annuity of $1 Table for 14 periods are as follows: Periods 4% 5% 6% 7% 14 10.5631 9.8986 9.2950 8.7455 REQUIRED: 1. Calculate the Net Present Value (NPV) of the expansion project. Assume that the factory building will have no salvage value. Show all of your calculations. (4 points possible.) 2. Calculate the Internal Rate of Return (IRR) for the expansion project. Show all of your calculations. (4 points possible.) 3. Based on the results of your NPV and IRR calculations above, should Alan recommend approval or rejection of the expansion project? Provide explanations for your answer. (4 points possible.) 4. Alan's sister, Paula, has just started up a new construction company that specializes in the construction of commercial buildings. Alan is extremely eager to see his sister's company get off the ground and become successful. Two years ago, Paula's husband, David, was severely injured during combat while serving with the United States Army and is totally and permanently disabled as a result of his injuries. Since David's injury, Paula has become very involved with the Wounded Warrior Project, serving as Chairman for the charitable organization's local chapter. She is also involved with several other charities in the area that provide food and other necessities to the homeless. Paula has pledged to donate 15% of the net profits from her construction business to charity. Alan knows that a $1,000,000 construction project could be life-changing for Paula's new company, Paula's family, and countless individuals impacted by the charitable organizations Paula is involved with. Alan could easily and discreetly) increase the estimated future annual net cash flows by a small amount (approximately $8,000), thereby changing the results of the calculations supporting a different recommendation to Johnson Manufacturing's board of directors. Explain why Alan should or should not consider doing this. Your explanation should be at least one-half page long (typed, double-spaced, preferably in a Word document) and should include adequate reasoning supporting your conclusion after considering all of the circumstances. (18 points possible.)
